On-Line Case Study Great Burger

Question 1
Client Goal: Should Great Burger acquire Heavenly Donuts as part of its growth strategy? Our client is Great Burger (GB) a fast food chain that competes headto-head with McDonald's, Wendy's, Burger King, KFC, etc. Description of Great Burger GB is the fourth largest fast food chain worldwide, measured by the number of stores in operation. As most of its competitors do, GB offers food and "combos" for the three largest meal occasions: breakfast, lunch, and dinner. Even though GB owns some of its stores, it operates under the franchising business model with 85 percent of its stores owned by franchisees (individuals own and manage stores, pay franchise fee to GB, but major business decisions (e.g., menu, look of store) controlled by GB). McKinsey study As part of its growth strategy GB has analyzed some potential acquisition targets including Heavenly Donuts (HD), a growing doughnut producer with both a U.S. and international store presence. HD operates under the franchising business model too, though a little bit differently than GB. While GB franchises restaurants, HD franchises areas or regions in which the franchisee is required to open a certain number of stores. GB's CEO has hired McKinsey to advise him on whether they should acquire HD or not. Q: What areas would you want to explore to determine whether GB should acquire HD?

A: Some possible areas are given below. Great job if you identified several of these and perhaps others. Stand alone value of HD Growth in market for doughnuts HD's past and projected future sales growth (break down into growth in number of stores, and growth in same store sales) Competition are there any other major national chains that are doing better than HD in terms of growth/profit. What does this imply for future growth? Profitability/profit margin Capital required to fund growth (capital investment to open new stores, working capital) Synergies/strategic fit Brand quality similar? Would they enhance or detract from each other if marketed side by side? How much overlap of customer base? (very little overlap might cause concern that brands are not compatible, too much might imply little room to expand sales by cross-marketing) Synergies (Hint: do not dive deep on this, as it will be covered later) Management team/cultural fit Capabilities/skills of top, middle management Cultural fit, if very different, what percent of key management would likely be able to adjust Ability to execute merger/combine companies

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 GB experience with mergers in past/experience in integrating companies Franchise structure differences. Detail dive into franchising structures. Would these different structures affect the deal? Can we manage two different franchising structures at the same time?

Question 2
Q: The team started thinking about potential synergies that could be achieved by acquiring HD. Here are some key facts on GB and HD. Exhibit 1

A: We are looking for a few responses similar to the ones below: Lower costs Biggest opportunity likely in corporate selling, general, and administrative expenses (SG&A) by integrating corporate management May be some opportunity to lower food costs with larger purchasing volume on similar food items (e.g., beverages, deep frying oil), however overlaps may be low as ingredients are very different GB appears to have an advantage in property and equipment costs which might be leveragable to HD (e.g., superior skills in lease negotiation) Increase revenues Sell doughnuts in GB stores, or some selected GB products in HD stores GB has much greater international presence thus likely has knowledge/skills to enable HD to expand outside of North America GB may have superior skills in identifying attractive locations for stores as its sales per store are higher than industry average, whereas HD's is lower than industry average; might be able to leverage this when opening new HD stores to increase HD average sales per store

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 Expand HD faster than it could do on ownGB, as a larger company with lower debt, may have better access to capital

Question 3
Q: The team thinks that with synergies, it should be possible to double HDs U.S. market share in the next 5 years, and that GBs access to capital will allow it to expand the number of HD stores by 2.5 times. What sales per store will HD require in 5 years in order for GB to achieve these goals? Use any data from Exhibit 1 you need, additionally, your interviewer would provide the following assumptions for you: Doughnut consumption/capita in the U.S. is $10/year today, and is projected to grow to $20/year in 5 years. For ease of calculation, assume U.S. population is 300m.

A: Possible responses might include the following: Market share today: $700M HD sales (from Exhibit 1) $3B U.S. market ($10 x 300M people) = 23% (round to 25% for simplicity sake) U.S. market in 5 years = $20 x 300 = $6B HD sales if double market share: 50% x $6B = $3B Per store sales: $3B/2.5 (1000 stores) = $1.2M Does this seem reasonable? Yes, given it implies less than double same store sales growth and per capita consumption is Helpful Tip You should always feel free to ask your interviewer additional questions to help you with your response.

Question 4
Q: One of the synergies that the team thinks might have a big potential is the idea of increasing the businesses' overall profitability by selling doughnuts in GB stores. How would you assess the profitability impact of this synergy?

A: Some possible answers include: Calculate incremental revenues by selling doughnuts in GB stores (calculate how many doughnuts per store, times price per doughnut, times number of GB stores) Calculate incremental costs by selling doughnuts in GB stores (costs of production, incremental number of employees, employee training, software changes, incremental marketing and advertising, incremental cost of distribution if we cannot produce doughnuts in house, etc.) Calculate incremental investments. Do we need more space in each store if we think we are going to attract new customers? Do we need to invest in store layout to have in-house doughnut production?

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 If your answer were to take into account cannibalization, what would be the rate of cannibalization with GB offerings? Doughnut cannibalization will be higher with breakfast products than lunch and dinner products, etc. One way to calculate this cannibalization is to look at historic cannibalization rates with new product/offering launchings within GB stores Might also cannibalize other HD stores if they are nearby GB storecould estimate this impact by seeing historical change in HDs sales when competitor doughnut store opens nearby Helpful Tip Be sure you can clearly explain how the assessment you are proposing would help to answer the question posed.

Question 5
Q: What would be the incremental profit per store if we think we are going to sell 50,000 doughnuts per store at a price of $2 per doughnut at a 60 percent margin with a cannibalization rate of 10 percent of GB's sales? Exhibit 2

A: Based on correct calculations, your response should be as follows: Incremental profit = contribution from HD sales less contribution lost due to cannibalized GB sales = 50K units x $2/unit x 60% margin 300K units x 10% cannibalization x $3/unit x 50% margin = $60K 45K = 15K incremental profit/store Helpful Tip While you may find that doing straightforward math problems in the context of an interview is a bit tougher, you can see that it is just a matter of breaking the problem down. We are looking at both your ability to set the analysis up properly and then do the math in real time.

Question 6
Q: You run into the CEO of GB in the hall. He asks you to summarize McKinseys perspective so far on whether GB should acquire HD. Pretend the interviewer is the CEOwhat would you say?

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A: Answers may vary, but here is an example of a response: Early findings lead us to believe acquiring HD would create significant value for GB, and that GB should acquire HD Believe can add $15 thousand in profit per GB store by selling HD in GB stores. This could mean $50 million in incremental profit for North American stores (where immediate synergies are most likely given HD has little brand presence in rest of world) We also believe there are other potential revenue and cost synergies that the team still needs to quantify Once the team has quantified the incremental revenues, cost savings, and investments, we will make a recommendation on the price you should be willing to pay We will also give you recommendations on what it will take to integrate the two companies in order to capture the potential revenue and cost savings, and also to manage the different franchise structures and potentially different cultures of GB and HD

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